Ethical Financial Planning

Last week I referred to June Smith's PhD thesis (which you can google) about ethics and financial planning.

Her findings are particularly interesting. I quote from them:

The [PhD research] data also suggested a demonstrated failure in advisory models and processes when advising on investments. In most of the cases analysed the advice to invest was simply not suitable to the particular client. ... It is evident from the data that the current legal framework for financial product advice did not operate effectively to protect consumers in some instances.

...the financial advice analysed in stage 2 of the [PhD] research was at times associated with the provision of template statements of advice and other disclosure documents not tailored to the client's specific circumstances. This one size fits all approach to the sale of financial products or strategies across client databases and inappropriate attempts to restrict the advice given so as to limit both liability and the advisory process adopted, is inconsistent with ethical and professional obligations and leads to greater risk for consumers. ...

It would seem there is a good argument for restricting the use of the term 'financial planner' in particular to those who are licensed or authorised to give financial advice and who meet other eligibility and competency criteria ...

It can be inferred from the research that the competency standards for financial planners are inadequate to equip them with the significant skills they require to provide financial advice in the complex financial services environment. The research has also revealed that younger financial planners (less than 40 years of age) have lower cognitive ethical reasoning levels and are therefore at increased risk of making unethical decisions.

...the research indicated that AFS Licensees may not be implementing formal and informal systems and procedures within their organisations that promote ethical culture and integrate governance, risk management, compliance and ethics frameworks. Evidence associated with the recent financial product and service provider collapses also suggested that current legal compliance frameworks alone may not be sufficient to reduce or prevent systemic unethical conduct within financial advisory firms.

To reduce this gap it is suggested that initiatives such as a specific legal requirement to meet Australian Standards on corporate governance may be the key to a new and invigorated approach to decision making and governance frameworks in financial services.

The research has also confirmed that there is a significant statistical relationship between the presence of ethical leadership within an organisation, organisational commitment and ethical conduct.

The systemic nature of some of the unethical conduct by financial advisers and across numerous clients that was identified in this study suggests motives other than the client's interests for the financial advice given. Failures to disclose the receipt of pecuniary incentives, high commissions and other third party benefits associated with the sale of third party and in-house financial products, were all practices identified...

The study's findings indicate that the current conflicts of interest issues facing financial planning participants are complex and significant. It is suggested that a purely regulatory or statutory response may not resolve these issues and that something else is required. Mere disclosure of conflicts of interest does not appear to be the answer.

We have not heard the end of this research even though I suspect there will be many people who hope if simply disappears. As I said last week I hope the Government are taking some of this work into account when framing the new Future of Financial Advice rules that will soon come on stream.

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